NAD Planned Giving and Trust Services Certification Course

NAD Planned Giving and Trust Services Certification Course Fiduciary Accounting #1

Learning Outcomes: 1. Identify the types of assets 2. Know how to value assets for various types of trust 3. Understand the difference between a revocable and irrevocable trusts 4. Recognize the types of income 5. Understand the accounting methods for corpus, principle and income

Essential Trust Elements: 1. Creator 2. Trustee 3. Property or assets 4. Beneficiaries 5. Trust agreement https: //www. beehive. org This lesson focuses on trust property—or assets. 3

Types of Assets • Cash • Bank accounts (checking, savings, MM, CD) • Non-retirement investment and brokerage accounts • Stocks and bonds • Tangible personal property (includes personal effects, household goods, motor vehicles, pets) • Business interest • Life insurance • Secured and unsecured personal loans (monies owed to the grantor) • Royalties, copyrights, trademarks and patents • Oil, gas and mineral rights • Real estate 4

Valuation of Assets Valuation is important for: • Establishing property tax assessments • Computing gain or loss on sale • Tax deduction • Trust accounting and financial accounting • Estate liquidity planning 5

Valuation of Assets Valuation for gift and estate tax purposes: • Date of transfer for gift tax purposes When did you donate the asset? • Date of death for estate tax purposes What was the date on the death certificate?

Alternate Valuation Date (AVD) of 6 months after Date of Death (DOD) • AVD is valid only if election will decrease value of estate and estate tax imposed • The AVD or DOD valuation election applies to ALL assets 7

Exceptions to Alternate Valuation Date • If AVD is elected and property is disposed of during the 6 months after DOD, property is valued at date of disposition, not AVD • The value of property that is affected by the passage of time (annuity), is valued at DOD, even if AVD applies to other assets 8

Trusts Divided Into 2 Groups: REVOCABLE IRREVOCABLE Property Grantor owns Trust owns Modification Yes No Taxes Fiduciary duty Grantor pays Grantor Trust pays Trustee

Valuation of Assets Revocable trust assets are recorded at either FAIR VALUE or COST The key is consistency

Valuation of Assets Fair Value: Willing buyer—willing seller rule! http: //www. teluguone. com The price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts 11

Valuation of Assets How to apply FMV to various assets? • Cash? Face value • Stocks? Value based on applicable market exchange on date of transfer • Stocks with no sales on date of transfer? Weighted average of sales price o dates immediately before & after gift date

Valuation of Assets How to apply FMV to various assets? • Real Estate? Many factors including size, shape, location, and market value of similar properties in area • Other assets (Art work, collectibles, copyrights)? Very hard to value and usually requires a professional appraiser 13

Valuation of Assets Valuation for Income Tax Charitable Deductions • Generally, the FMV of the donated property on the date of transfer to the charity is the figure that should be used 14

Valuation of Assets Factors affecting Income Tax Charitable Deduction Valuations • Restrictions placed on the use of the asset by the donor • Difficulties in the use of the asset by the charity • Other circumstances relating to the transaction

Major Exception: Lower of Donor’s Adjusted Basis or FMV • If property sold by the donor would produce ordinary income or term capital gain, the value is limited, for income tax charitshortable deduction purposes, to the donor’s adjusted basis. • If FMV is lower than the adjusted basis, the lower amount is used as the deductible amount. 16

Valuation of Assets Cost: The original amount of resources spent in acquiring the asset—includes all fees/commissions, etc. Sometimes called tax cost. When capital improvements are added we arrive at the adjusted basis.

Valuation of Assets Contingent Assets: • An organization MAY elect to record contingent assets for tracking purposes • If the organization chooses to record them, contingent assets are usually recorded at a nominal value such as $1

Valuation of Assets Irrevocable trust assets recorded at fair value when asset is placed in trust or estate

Different Types of Irrevocable Trusts 1. Charitable remainder trust 2. Pooled life income agreement 3. Lead trust 4. Life insurance trust

Definitions • Simple trust—all income distributed currently; no income set aside for charitable purposes; no other amounts paid out during the year • Complex trust—not a simple trust; any trust that distributes principal

Annuities Contracts, not trusts Consists of 2 parts: 1. Single premium annuity (investment in contract) 2. Gift portion

Annuity funded with cash? • Each annuity payment is part ordinary income and part tax free principal during annuitant’s life expectancy • Payments made after annuitant’s life expectancy are fully taxable as ordinary income

Annuity Funded with Appreciated Assets? • Long term gain (assets held more than a year) allocated proportionately between gift portion and investment in contract • Capital gain allocated to gift portion is forgiven • Capital gain allocated to investment is taxable • Each payment has 3 components: ordinary income, capital gains, and tax-free return on principal

Capital Gains • Short term gain: Asset held for less than 12 months • Long term gain: Asset held for more than 12 months • Ordinary income: Interest, dividends, royalties, and rent

Gift of Remainder Trust • Gifts in trust of a charitable remainder are deductible for gift, estate, and income tax purposes if made through a unitrust, annuity trust, or pooled income fund • Deductible amount is the FMV of the property less the present value of lifetime payments. Qualified Appraisal required to establish FMV

Gifts of Remainder Interest, cont. • Gifts of remainder interest in a personal residence, farm, or charitable gift annuity are also deductible at the present value of the remainder interest • Deductible amount is calculated the same as in charitable remainder trusts. Qualified appraisal required for all non-cash property donated

Types of Charitable Remainder Trusts: 1. Split interest trust 2. Annuity trust 3. Standard unitrust 4. Net income trust 5. Net income with make-up unitrust 6. FLIP trust

Charitable Remainder Trusts • Qualified charitable remainder trust is tax exempt • No tax paid on realized gain when selling appreciated assets or on trust income • Donor is eligible for income, gift and estate tax charitable deductions

Suggested Resources 1. NAD PGTS Manual Chapter 23 2. Seventh-day Adventist Accounting Manual Appendix 15 C 3. http: //www. nadadventist. org/site/1/docs/SDAAM_Jan 2011 Final. pdf

Questions?